Self-employment taxes are taxes that are paid by self-employed individuals to fund Social Security and Medicare. These taxes are similar to the payroll taxes that are withheld from the paychecks of employees and paid by their employers. However, because self-employed individuals do not have an employer to withhold taxes from their income, they are responsible for paying their own self-employment taxes.
The self-employment tax rate is 15.3%, which is made up of two parts: the Social Security tax rate of 12.4% and the Medicare tax rate of 2.9%. The self-employment tax applies to net self-employment income, which is calculated by subtracting business expenses from self-employment income.
Self-employed individuals are required to pay self-employment taxes if their net self-employment income is $400 or more in a given year. They can calculate their self-employment tax liability using Form 1040, Schedule SE. Self-employed individuals can also claim a deduction for a portion of their self-employment taxes on their tax return, which can reduce their overall tax liability.
In addition to self-employment taxes, self-employed individuals may also be required to pay state and local taxes, as well as other taxes such as sales tax and excise taxes. It is important for self-employed individuals to understand their tax obligations and to make timely payments to avoid any penalties or interest charges.